What is Churn Rate? Pros, Cons and Examples

“Retention problems sneak up on you. You need to be actively monitoring retention cohorts even when retention is going up and to the right.”

- Dan Wolchonok

 

As advised by Dan Wolchonok, monitoring retention is very important even when everything is fine. In order to be successful and people-oriented it is important to check why the customers are unhappy and they are leaving.

 

In most cases when marketers think they are losing many users they tend to focus on retention strategies and churn rates. But when everything is fine, they forget the importance of churn rates and monitoring users.

 

This loss of focus can be very risky in future. In this blog, we will learn about Churn rate and why it is important, with the help of some examples.

 

Also Read | Strategies of Customer Retention

 

What is Churn Rate?

 

Churn rate also known as customer churn rate is the percentage of the customers that a business loses in a period of time. It also means the customers that have unsubscribed themselves from a particular service of the business.

 

There are multiple meanings of churn rate. Some also use churn rate to depict the percentage of employees that have resigned or quit their jobs in a particular period. For any business to be profitable and worthy, its growth rate must exceed the churn rate at all times.

 

Growth rate and churn rate are both opposites as the former one deals with acquisition of new clientele whereas the latter is focused entirely on the customers lost. There are many different industry types and the average churn rate of each one is different.

 

Let us understand Churn Rate a bit deeper. There can either be a high churn rate or low churn rate. A high rate means that business is severely affected in terms of growth and profits. For some industries like telecommunications, churn rates are continuously monitored as competition is very high.

 

There are many big service providers in the Telecommunications sector. Therefore, it is very easy for customers to change and shift to a new provider. Retention rates are quite high in this area.

 

Churn Rates show the customers that have switched as well the customers that have terminated the services. Mostly in subscription based businesses, Churn rate plays a key role. There is no standard rate which is considered good or bad when we talk about Churn Rate of any industry.

 

There are multiple uses of Churn Rate like:

 

1. For measuring the overall financial health and long-term prospect of the company.

 

2. To compare the monthly or yearly results of whether or not we are improving the customer retention.

 

3. Finding out the adverse factors that have led to low customer retention.

 

4. Computing the customer lifetime value

 

5. Finding out the best products which have the highest retention rates and the products that have low retention rates.

 

6. Predicting the performance of the company.

 

Pros and Cons of Churn Rate

 

By now we know that Churn Rate is mostly used by the businesses that run on subscription based models. Given below are the pros and cons of computing Churn Rates.

 

Pros

 

• It offers clarity over the quality of business.

 

• You get to know if the customers are satisfied or not with the service that you are offering.

 

• You can compare the churn ratio with other competitors to decide on an acceptable rate.

 

• Computation of Churn Ratio is very simple.

 

Cons

 

• You do not get complete clarity about the customers that have terminated their services. It means you never get to know if the customers that left were new or old.

 

• Inaccurate differentiation is done.

 

Also Read | Customer Behavior Analytics

 

Can you reduce Churn Rate?

 

What happens if the Churn rate is high? Is there a way to control or minimize the churn rate? Ofcourse, there is! Given below are some ways in which you can reduce the Churn rate to an acceptable level.

 

1. Analyze the Churn Rate

 

The first and the foremost thing that you can do is to analyze the churn rates correctly. You need to find out when churning happens. Once you find out the reason for churning you can use it as an opportunity to prevent customers from leaving.

 

2. Start correct

 

Whenever you start providing the services, you must be robust and attentive to all the needs and demands of the customers. If you do this, there are maximum chances that customers will be satisfied and they will not think of either switching or terminating in future.

 

3. Training for sales rep

 

The person sitting behind the desk and dealing with customer issues must be attentive, smart and robust. He must know how to deal with different types of customers and solve their queries. 

 

For this, recruiting the right people in the sales and marketing team and timely offering training and skills development courses is important.

 

4. Customer Feedback

 

Customer Feedback is the most important and valuable piece of information that you have. Every customer must feel that his issues are being heard and proper corrective steps are taken for it.

 

You must approach them after a fixed period of time like every 10 days or 15 days to ask them about their experiences. You must make them feel comfortable so that they can express their views freely.

 

5. Proactive Communication with Users

 

Maintaining a strong relationship with the customers is also very important. Loyalty of service providers is equally important as the loyalty of customers. Customers must feel that they are getting the best services for their money.

 

If you are proactively communicating with your customers then they will feel welcomed and there are high chances of a low churning ratio in future.

 

Also Read | Customer Journey Analytics

 

Examples of Churn Rate

 

“We see our customers are invited guests to a party, and we are the hosts. It’s our job everyday to make every important aspect of the customer experience a little better.”

 

- Jeff Bezos

 

There are many Software-as-a-Service companies and B2C companies that have released their churn rates. The main motive was to show how effective they are in retaining their customers.

 

Mainly Churn Rates are used in subscription based companies. There are two main spaces that compute Churn rates which are given below.

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Examples of Churn Rate

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1. Telecommunication Industry Churn Rate

 

Telecommunication sector has the most competition because of the number of service providers that have a huge customer base and market share. Reliance, Vi, Airtel are some of the world famous telecom providers.

 

Many surveys have shown that around 39% of the people in America have switched to a different provider in the past 2 years. The main reason was ineffective customer service experiences.

 

Around 52% of people have canceled their internet, cable TV and Mobile services contract. There are many reasons why telecom industries have a high churn rate like:

 

• A lot of time is wasted by companies in solving customer issues.

 

• Customers have felt unvalued as they had to call multiple times for the same reason.

 

• The sales rep and executives were unattentive, rude, ineffective listeners.

 

It is obvious that every customer that has left or switched has made many other customers switch and terminate their services as well. 

 

One person in a family that experiences dissatisfaction with one telecom operator will change the entire family’s operators as well.  Every customer that is unhappy will tell many others about his experiences.

 

Survey has shown the following facts:

 

1. 10% of people have shared their views on an online forum.

 

2. 79% of the people have shared their unhappy experiences with their families and friends.

 

3. 22% of the people have shared their views on social media apps.

 

4. 12% of the people have posted on the official website of the company about their unpleasant experiences.

 

Therefore, every service provider must value each and every customer to reduce the churn rates.

 

Also Read | Social Media Marketing

 

2. Employment Churn Rate

 

Employment Churn Rate is also an example of  the spaces where churn rates are widely used. For every company it is important to monitor the employees for growth and productivity.

 

Having high employment churn rates can cripple the overall financial health and productivity of the organization. Companies have to spend on recruitment and hiring. Skill training must be imparted to improve the skill set of new employees.

 

Therefore, if companies can reduce their employment churn rates then it can save a lot of money. SHRM i.e. The Society of Human Resource Management gave the following figures in this regard:

 

If an employee is replaced in between a period of 6-9 months that earns around $35,000 per annum then it will cost roughly between $17,500 - $26,250 to cover up the whole recruitment and hiring process.

 

Moreover, having a huge employment churn rate creates a pressure on other employees to cover up for the ones that have left. They have to bear the burden until new ones are recruited. 

 

Because of this, even the most qualified and experienced personnel often leave the workplace. Company has to bear more expenses to hire someone in his place and impart him with training to learn.

 

Also Read | Customer Experience Trends

 

 

Churn Rate of Most Popular Companies

 

Here are the churn rates of some of the most subscribed companies all over the world.

 

1. Netflix

 

It has a churn rate of 2.5% every month. It is probably the lowest rate as compared to every other video-streaming company. It means that around 97% of its users return every month to subscribe.

 

2. Disney

 

Disney has not included itself in the rest of the video-streaming companies. It has its own line of subscription and distributions. It has a monthly churn rate of 4.3%. In 2019 when Disney +  was launched, users all over the world went crazy and subscribed.

 

3. Spotify

 

Spotify is used for streaming music across the globe. It has a monthly churn rate of 4.8% only. People can build their own music libraries after taking a paid subscription. Around 95% of its customers come back every month to renew and update their music playlists.

 

It is necessary for every SaaS, B2C, Telecom and other industries to know how many of their customers have left them. In fact, it is more important to know the reasons why they have left and overcome them.